The Hull Petroleum Company and Inverted V are retail gasoline franchises that compete in a local market to sell gasoline to consumers. Hull and Inverted V are located across the street from each other and can observe the prices posted on each other’s marquees. Demand for gasoline in this market is Q = 50 – 10P, and both franchises obtain gasoline from their supplier at $1.25 per gallon. On the day that both franchises opened for businesses, each owner was observed changing the price of gasoline advertised on its marquee more than 10 times; the owner of Hull lowered its price to slightly undercut Inverted V’s price, and the owner of Inverted V lowered its advertised price to beat Hull’s price. Since then, prices appear to have stabilized.
What oligopoly model can be used to explain this situation?
Suppose the market has reached the equilibrium, how many gallons of gasoline are sold in the market, and at what price?
Suppose Hull decides to open a convenient store next to its gasoline station, do you expect the same answer in (b)? What type of product differentiation is this?
Suppose Inverted V had service attendants available to fill consumer’s tanks but Hall was only a self-service station, would your answer in (a) differ? What type of product differentiation is this?